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Slide 1
Thank you, Kevin, for your introduction, and for the opportunity to
be here again this year.
Good morning to all of you.
It’s a pleasure to be back at the
Scotia Capital conference, which every September signals the business
year is under way.
Slide 2 – Forward Looking Statements & Other
Before I begin, as noted, my comments may include forward-looking statements.
Slide 3 – Today’s Agenda
I’d like to talk about three things today. First, the change that’s
been under way at our company over the last 36 months and what we’ve
accomplished during that time. Second, some context with regard to the
North American regulatory environment. And third, where we’re headed
and why we’re well positioned to get there.
Slide 4 – Strong Operating Momentum and Earning Power
As you know, BMO recently
reported good third quarter financial results. Our net income for the
quarter was $557 million, with an ROE of 12.1%.
These results reflect a normalization process underway – both in the
economy and the financial markets. North American markets are not yet
out of the woods and there is a long way to go, but we’re encouraged
that a recovery has begun.
Looking at year-to-date
numbers – and adjusting for notable items – revenue growth
was 9.4% with operating leverage of 1.3%, which reflects continued
investment in our businesses.
In the nine months, pre-provision,
pre-tax earnings were $2.6 billion – as reported but excluding severance
costs recorded in Q2 – and
that was 12% above last year. These results provide an insight into the
strong operating momentum and earning power of BMO. We’re well
positioned to compete very successfully in a new operating environment
that is emerging for banking and investing, and which I’ll get
to shortly.
Our results reflect the re-orienting of our businesses through a systematic,
multi-year effort aimed at strengthening our brand, customer loyalty,
competitiveness and core business performance.
Slide 5 – Strong Operating Group Performance
Let me take a few moments to provide some group highlights that underline
these achievements.
P&C Canada has posted excellent results for four consecutive quarters.
This strength reflects the tangible success of our focus on improving
our customers’ experience across their entire relationship with
us. This includes the work we’re doing operationally and culturally
to deliver against the market position reflected in our advertising.
We’re demonstrating solid momentum across all business segments
– personal, commercial and cards – and we’re keeping our foot
on the accelerator.
For those of you attending
our P&C Canada Investor Day tomorrow,
you’ll be spending some time with Frank Techar and the leadership
team as they describe in detail this important part of our company.
In the United States,
our P&C bank is competing well in a challenging environment.
Harris has continued to pursue new business in the marketplace at a time
when others have receded or fallen away completely. We’ve increased
our visibility with expanded advertising and promotion. We’ve grown
deposits and significantly increased mortgage originations.
And the latest J.D. Power rankings show Harris in a number one position
for customer satisfaction in Midwest retail banking.
Our Retail Net Promoter Score
remains strong and consistent, at a time when many competitors’ scores
have deteriorated. We intend to expand our share of the deposit and
loan market in Chicago and in adjacent urban
cities including Indianapolis and Milwaukee.
Slide 6 – Strong
Operating Group Performance
Our Private Client Group is
performing well in all of our traditional wealth management businesses – full
service brokerage, mutual funds and private banking. And now, our recent
insurance acquisition has created
another strong pillar for this group. In fact, the strength of the BMO
brand has been complementary to the insurance business – particularly
in providing new momentum in the universe of Managing General Agents.
BMO Capital Markets is delivering
strong financial results this year. We’re benefiting from revenue
opportunities across a number of our trading businesses arising from
client flows, a favourable interest
rate environment and narrowing credit spreads.
In the longer-term, we have confidence that our diversified business
mix and client-centered strategy will continue to generate high quality
earnings, with an improving return on equity.
Importantly, in all four business
groups at BMO, the improvements we’ve
made in customer service have not come at the expense of operating leverage.
We’ve worked hard to simplify our organizational structure, ensuring
that our spending is targeted at customer-facing initiatives, and we
are starting to see the benefits.
Slide 7 – Consistent Discipline in Credit Risk Management
A quick comment on credit
losses: As I said on the Q3 call, we take a methodical, loan-by-loan
approach to valuing our portfolio and we’re
comfortable with where we stand.
We expect provisions to remain
elevated into 2010. However, negative migration is moderating and we’re
confident that the strength of our core business earnings will absorb
our credit losses through the
cycle.
Slide 8 – Excess Capital Provides Opportunities
Our balance sheet at the end of the third quarter was strong. Our Tier
1 Capital Ratio was 11.7% and our tangible common equity to risk-weighted
asset ratio was 8.7%. This strength underlines our capacity for growth.
Slide 9 – North
American Regulatory Environment
With that overview of our
bank’s current performance and the strategy
driving it, I thought I would reflect on the impact of the regulatory
environment on growth prospects for North American banks and what it
all means for BMO.
It’s now been one year
since Lehman Brothers failed and our whole financial system was threatened.
Fortunately, the system proved resilient.
While it will clearly take more time for the employment outlook to improve,
there has been notable progress in a number of important economic indicators:
- Capital markets have stabilized and spreads have narrowed;
- The global financial
institutions are in much better shape; capital positions have improved;
- Consumers have moved from borrowing to saving; and
- The housing market seems to have found a floor.
This reflects the
normalization process I referenced earlier. However, there’s
still a lot of work to be done to ensure this type of threat to our
financial system does not re-occur and, appropriately, regulators
have gone from reactive to proactive.
What made this threat so profound was the speed with which the crisis
spread from company to company, reflecting a previously under-appreciated
degree of inter-connection between markets. This is a major element of
what we know as systemic risk. For those of you interested in the topic,
a very credible framework was recently published by the Federal Reserve
Bank of Cleveland, and provides a great starter piece for anyone interested
in the likely direction of new regulation to address this risk.
Acknowledging that the U.S. government could have done more to prevent
the worst financial crisis since the Great Depression, the administration
is now leading the reform initiative, promoting:
- Robust supervision and regulation of all financial firms;
- Comprehensive supervision of financial markets;
- Protection for consumers and investors from financial abuse;
- New government tools to manage financial crises; and,
- Greater international regulatory standards and cooperation.
From these objectives
come numerous recommendations, and it’s
becoming clear that reforms to reduce both the likelihood and consequences
of business failures will embrace:
- Many more companies, such as insurers, asset managers and
hedge funds;
- More products – including
over-the-counter derivatives, particularly credit default swaps;
and
- More entities that support financial markets, such as exchanges, clearing
houses and credit rating agencies.
In addition, more regulation will move to the federal level, including
a potential overall super-regulator.
During the second quarter,
416 banks failed the FDIC’s grading
system for asset quality, liquidity and earnings. This year just over
90 U.S. banks have been closed. This has been the fastest pace of closures
in 17 years and the restructuring process is ramping up.
This signals potential opportunities
for banks with strong balance sheets, good core business performance
and a firm foothold in the U.S. market … like
BMO Financial Group.
Slide 10 – Positioned
for Success in the New Environment
To understand the implications
for BMO’s long-term growth and
success, it’s instructive to look at the recommendations from the
U.S. Treasury which include:
- Higher capital requirements for banks;
- Higher quality capital, notably common equity;
- More forward-looking capital requirements and accounting rules, so banks
would hold more excess capital in good times, to be available in
bad times;
- Explicit liquidity standards for banks; and,
- Better measurement of
portfolio risks, the capital required to protect against them and
constraints on banks’ use of leverage.
At BMO we endorse these measures, which in fact are entirely consistent
with how we think about running our bank and reflect many of the elements
present in the Canadian regulatory environment.
While I can’t tell you exactly what the final language and mechanisms
of reform will look like, I can tell you how we’re approaching
them. We see the changes not as ‘necessary regulation,’ but
as ‘good business.’
A more robust regulatory environment enhances the stability and sustainability
of our shared financial system. That is good for our customers and therefore
good for us.
Slide 11 – Making
Money Make Sense
It was a year ago
that we introduced the notion of ‘Making Money
Make Sense’ – the external statement of what we believe is
a very compelling position for us in the market. BMO Financial Group
is positioned
to capitalize … with a brand promise that resonates particularly
well with customers and we’ve made the operational changes necessary
to deliver against it.
The gains we’ve made in our core businesses over the past 18 months
reflect the fact that we have supported our customers and provided them
with a differentiated experience. This doesn’t apply just to retail
banking. It also includes our large corporate and institutional clients,
for whom we provided essential capital and liquidity when needed during
the financial crisis.
There is a huge amount of energy behind our brand promise – more than
I can recall in the time I've been with the company. This is coming through
in the customer feedback we receive – and as importantly in the feedback
from employees – for whom advocacy is at an all time high. And most
importantly, it's coming through in our core earnings.
If there was a point in time
anyone wondered exactly what Bank of Montreal stood for – it
just isn’t the case today. The changes we’ve
made internally – both to our operations and our culture – now allow
our 36,000 employees to personally play a part in delivering on the brand
promise … which remains our highest priority.
Slide 12 – Committed
to Our Customer Promise
There are literally
dozens of initiatives supporting this promise. Here
are a few examples:
First, we’ve taken a look at how we manage relationships with
new customers to BMO – to ensure we have regular meaningful contact
with them to win more of their business. We’ve made adjustments
across the board – people and training, policies and the technology
that supports them all;
Second, we’ve
designed retirement planning services to help people plan for every
aspect of
retirement and prepare for these risks: longevity,
inflation, market volatility. This strategy runs across all our retail
wealth products;
And a third example,
we’ve
redesigned our entire retail and commercial lending process in the
United States so that every step, every procedure, every
document supports the brand and gets customers what they need.
While we are constantly
asked about potential acquisitions in the United States, what is most
important is that Harris is well positioned today to be
a first call for new banking relationships. This bodes well for strong
organic growth.
Some observers have predicted
that the new regulatory environment could bring with it reduced margins
and lower returns on equity for the industry.
We think that view may be premature. We’re seeing that strong deposit
growth and reduced non-bank competition is reversing margin erosion.
In fact, we expect return on equity to increase.
Slide
13 – Key Takeaways and Looking Forward …
Before
I invite your questions, I’d like to conclude with a few
key messages.
First, BMO Financial
Group has strong, well positioned core businesses that are generating
very
solid financial results. I can tell you that
– while we’re pleased with our results and progress to date – we’re
not yet satisfied. We can and will continue to improve.
Second, we’ve come through the economic downturn and financial
crisis with a very strong capital position. We’ve dealt effectively
with the related issues and didn’t allow them to serve as a distraction.
Third, our change agenda is focused on the customer and continues to
be executed deliberately and systematically across all our businesses
– and we're seeing the results.
Fourth, we continue to execute our expense management plan with no impact
on the quality of the work we do for customers.
And fifth, BMO is ideally positioned to benefit from the new regulatory
environment taking shape. Our primary focus throughout the recession
was to stand by customers. This highlighted the shift in tone in the
company and strengthened our reputation as a high quality financial partner.
Now – as we emerge from recession, we will see once-in-decades opportunity
for growth.
I can tell you that today, at BMO, we have the platform, the capital,
the customer orientation and the expertise to be a market leader.
Slide 14 – Q&A
Thank you for your attention.
I’ll now be pleased to answer any
questions that you may have. |
